Zombie Oil: Fossil Fuels Still Need Subsidies

October 4, 2017

Countries in the G20 have committed to phase out ‘inefficient’ fossil fuel subsidies. However, there remains a limited understanding of how subsidy removal would affect fossil fuel investment returns and production, particularly for subsidies to producers. Here, we assess the impact of major federal and state subsidies on US crude oil producers. We find that, at recent oil prices of US$50 per barrel, tax preferences and other subsidies push nearly half of new, yet-to-be-developed oil investments into profitability, potentially increasing US oil production by 17 billion barrels over the next few decades. This oil, equivalent to 6 billion tonnes of CO2, could make up as much as 20% of US oil production through 2050 under a carbon budget aimed at limiting warming to 2 °C. Our findings show that removal of tax incentives and other fossil fuel support policies could both fulfil G20 commitments and yield climate benefits.

Government subsidies to American energy companies are generous enough to ensure that almost half of new investments in untapped domestic oil projects would be profitable, creating incentives to keep pumping fossil fuels despite climate concerns, according to a new study.

The result would seriously undermine the 2015 Paris climate agreement, whose goals of reining in global warming can only be met if much of the world’s oil reserves are left in the ground.

The study, in Nature Energy, examined the impact of federal and state subsidies at recent oil prices that hover around $50 a barrel and estimated that the support could increase domestic oil production by a total of 17 billion barrels “over the next few decades.”

Using that oil would put the equivalent of 6 billion tonnes of CO2 into the atmosphere, the authors calculated.

Taxpayers give fossil fuel companies in the U.S. more than $20 billion annually in federal and state subsidies, according to a separate reportreleased today by the environmental advocacy group Oil Change International. During the Obama administration, the U.S. and other major greenhouse gas emitters pledged to phase out fossil fuel supports. But the future of such policies is in jeopardy given the enthusiastic backing President Donald Trump has given the fossil fuel sector.

The study in Nature Energy focused on the U.S. because it is the world’s largest producer of fossil fuels and offers hefty subsidies. The authors said they looked at the oil industry specifically because it gets double the amount of government support that coal does, in the aggregate.

Written by scientists and economists from the Stockholm Environment Institute and Earth Track, which monitors energy subsidies, the study “suggests that oil resources may be more dependent on subsidies than previously thought.”

‘Zombie oil’ that ought to stay in the ground is kept alive thanks to federal and state governments in the US feeding it billions of dollars. This is oil consumers don’t need, and that oil companies therefore wouldn’t touch without these subsidies, a new analysis published in Nature Energy reveals.

Subsidies are not cash handouts. They’re a mix of tax breaks, tax credits, and regulations that forego government revenue, transfer liability, or provide services at below-market rates. Another significant subsidy takes the form of uncompensated government costs for fixing roads damaged by heavy fracking trucks. Governments justify these as supporting economic growth and job creation.

About half of 800-plus untapped US oil fields (what’s widely called “zombie energy”) would be too costly to drill when oil is $50 a barrel, report co-author Peter Erickson, senior scientist at the US Center of the Stockholm Environment Institute, told me in a phone interview. Oil has averaged just under $50/barrel for the last 24 months.

The analysis looked at the impact of $4 billion a year in production subsidies given to oil companies. Study authors argue this money encourages companies to drill oil fields that would otherwise be unprofitable. That would likely produce 17 billion barrels and, once burned, add 7 billion tonnes of additional climate-heating carbon dioxide emissions to the atmosphere by the year 2050.

For untapped fields that would be profitable even without receiving government funds, subsidies just pad the oil industry’s bottom line. For oil producers in Texas, subsidies boost profits by 11 percent, said Erickson. “Who wouldn’t want an 11 percent bump in salary?”

“This is oil we don’t need and it takes the US further away from its climate goals of reducing CO2 emissions,” he said.

The US is awash in oil and has become a major exporter since Congress lifted the crude oil export ban December 2015. By late September of this year, the US was exporting 1.5 million barrels of crude oil a day to 20 different countries, including China and Brazil. That translates into 30 million gallons of gasoline leaving the US every day.

While $4 billion is a lot of money, it’s only part of the estimated $20.5 billion a year giveaway to the oil, gas, and coal industries, according to a separate new report published today by Oil Change International, a nonprofit based in Washington DC. At least $6 billion of this is from state governments.

“These industries have permanent subsidies at least seven times greater than what renewable energy receives,” said report author Janet Redman in an interview.

In 2009, countries in the G20 (including the US) pledged to reduce fossil fuel subsides, acknowledging that they distort markets, impede investment in clean energy sources, and frustrate efforts to address climate change. The Trump administration has already reversed the few modest curbs that had been put in place by President Obama, like increased royalty rates, and is working to open up more public lands to oil and gas exploration, such as the 19.6 million acre Arctic National Wildlife Refuge.

Last week, Secretary of Energy Rick Perry proposed new government pay-outs to the coal industry that’s losing market share to cheaper natural gas and renewables.

Redman isn’t surprised. In the 2015-2016 federal election cycle, oil, gas, and coal companies spent $354 million in campaign contributions and lobbying, and received $29.4 billion in federal subsidies in total over those same years—an 8,200 percent return on investment, the report said.

Like this:

3 Responses to “Zombie Oil: Fossil Fuels Still Need Subsidies”

There are zero subsidies to fossil fuel producers. The tax code does allow the producer of a depletable resource like oil to write off the cost of development and production as a cost of production since that production reduces the value of the resource as it is used up. That write off is available to any person or company which produces something and has spent on assets to produce that income. The claim of subsidies comes from the accelerated depletion allowance. All that does is allow you to write off most of your resource costs in the early years of production. Calling that subsidies is a crock of BS as the government gets it tax money , all of it in the end , from each resource.

I never heard subsidies expressed in depreciation. Most of the subsidies I know about are in going to war to protect access to supplies or externalizing (aka “socializing”) the high cost of spills, access canals, lung-damaging emissions and other environmental insults.